Question

1- How do the concepts of "pricing strategies" introduced in this chapter fit in with the "supply and demand" concepts introduced at the beginning of the semester?

Answer 1

The market is in equilibrium when supply curve intersects demand curve that supplies equal to demand. There is a positive relationship between price and quantity supplied. So supply curve is positively sloped. There is a negative relationship between price and quantity demanded. So the demand curve is negatively sloped. When the price is above the market equilibrium, supply is more than demand. That is there is a surplus in the market. Invisible hand clear the market. As there is a surplus in the market, sellers want to sell all the surplus products at a low price so there is always a downward pressure on the price.

If the price is below the market equilibrium, demand is more than supply. It creates a shortage. So there is always a upward pressure on price until the market is clear.